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1. F. James McDonald the former president of the US automobile workers federation suggested an average reduction of 4% in the price of the car. The automobile market was weak, which resulted in unemployment. Lower price would lead to greater sales and stimulate employment. McDonald believed that a 4% reduction in price would increase sales by 16%.David black, representing the management of the automobile manufacturers disagreed with McDonald’s estimation. Black cited studies which indicated price elasticity’s ranging from 0.5 to 1.5.Black made it clear that he was referring to the elasticity of demand in response to a permanent price change of all manufacturers. He admitted that the elasticity to a temporary price cut might be greater. The studies to which Black referred found elasticity’s ranging from 0.65 to 1.53.
a. Explain the concept of elasticity of demand and the factors that affect it.
Answer:-
From the decision-making perspective, the firm needs to know effect of changes in any of the independent variables in the demand function on the quantity demanded. Some of these variables are under the control of management, such as price, advertising, product quality, and customer service. For these variables, management must know the effects of changes on quantity to assess the desirability of institution the change. Other variables, including income price of competitor’s products, and expectations of consumers regarding future prices, are outside the direct control of the firm. Nevertheless, effective forecasting of demand requires that the firm be able to measure the impact of changes in these variables on the quantity demanded.
The most common used measure of the responsiveness of the quantity demanded to changes in any of the variables that influence the demand function is elasticity. In general, elasticity may be through of as a ratio of the percentage(%) change in one quantity(or variable) to the percentage(%) change in
a. Explain the concept of elasticity of demand and the factors that affect it.
Answer:-
From the decision-making perspective, the firm needs to know effect of changes in any of the independent variables in the demand function on the quantity demanded. Some of these variables are under the control of management, such as price, advertising, product quality, and customer service. For these variables, management must know the effects of changes on quantity to assess the desirability of institution the change. Other variables, including income price of competitor’s products, and expectations of consumers regarding future prices, are outside the direct control of the firm. Nevertheless, effective forecasting of demand requires that the firm be able to measure the impact of changes in these variables on the quantity demanded.
The most common used measure of the responsiveness of the quantity demanded to changes in any of the variables that influence the demand function is elasticity. In general, elasticity may be through of as a ratio of the percentage(%) change in one quantity(or variable) to the percentage(%) change in